Great Returns from Buy and Hold

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I wrote a reply to an article that put down buy and hold investing the other day and the way I ended my response was to show that through buy and hold investing my net worth has increased almost every year – and not by a little.

First a definition. Buy and hold investing is where you invest with the intention of holding onto your investments for a long time period. What buy and hold investing is not is: buy and forget, buy and ignore, buy and hope, buy once and hold.

That last one is really the key. People who put down buy and hold investing seem to think that there is no way to take advantage of market opportunities unless you actively trade. That’s non-sense. When the market dips you can buy more, at a lower price, which is what you want to do, buy low and sell high.

The other mistake opponents of buy and hold investing make is to assume that stock and bond investing is all there is to a diversified portfolio. Well the more money you have the more you can branch out into other things such as commodities like gold and other metals, real estate, or a side business. Also don’t forget that you are your best means to diversification and should not discount your ability to increase your salary by getting promoted or changing jobs.

Since opponents of the buy and hold method often assume that stocks are your only investment they like to point out that these past twelve years have been flat. They’re right if they ignore two very important things that simply can’t be ignored: dividends and dollar cost averaging. Dividends are distributions of a company’s profits to their shareholders. Dollar cost averaging is the technique of buying stock (or mutual funds) on a regular schedule regardless of the share price. The idea is that you end up buying more shares when prices are low and fewer shares at the high price. As stock or mutual fund prices fluctuate you do better than simply buying once and forgetting.

S&P 500 over the past 10 years

I use a modified dollar cost average technique of my own. I invest at regular intervals through my 401k at work. In my personal investment accounts, I will accumulate cash and buy only on days the market is down. If the market has been rising steadily I’ll buy less often and accumulate more cash. If the market has been doing poorly and has one bad day after another, the accumulated cash allows me to buy more frequently. This technique takes discipline, there’s no doubt about that. The important thing is that I have been fully invested throughout so I haven’t missed any of the gains and because this is not money I need in the short term. 

As I mentioned at the start of this post I ended my comment to the other article by providing the percentage increase in my net worth over the last twelve years (there’s a benefit to being a financial nerd). So here it is in chart and graph form:

My net worth percentage change chartMy net worth graph

Please note that this does not depict my stock performance only but is an overall net worth. I feel this is a more accurate picture of all my investments, not just stocks. As you can see there were only two years that I had a negative return. The graph shows the dollar figure of my net worth (numbers removed for obvious reasons) in red and the green at the bottom is the amount by which my net worth increased or decreased (the chart in graph form).

None of this can be achieved without a plan and the discipline to stick with it. Do you have a plan for how to increase your net worth each year? Share your techniques in the comments section.

 


Posted in General, Money, Success and tagged , , , by with 5 comments.

Comments

  • Chris Barber says:

    I think this is a great strategy for anyone who wants to mitigate risk without having to use a financial professional. If you want to mitigate risk even more then I would suggest investing at per-determined time intervals rather than when it is “low” and not as much when it is “high.” The reason is that deciding when “high” and “low” is can become very emotional. I’ve found that most poor financial decisions are based on emotions or a sunk cost bias. Great overall strategy!

    • AJ says:

      Great Chris. Thanks for your quick review. There are a lot of emotional traps in investing – that’s why there are professionals like you.

  • Bruce Welton says:

    Nice article, A.J. It’s nice to see that such a simple strategy has been productive for you. I am trying to develop more attention to this area of my life. I think until I hit my thirties, I really had little concept of what money was (“Say- what is that you got there?”) and how to take care of it. It’s been a slow learning curve.

    I have also heard that buy and hold, though conservative to some, is a great way to patiently manage and build wealth.

    Thanks!

    • AJ says:

      Thanks Bruce. And my editor thanks you. Love your last line. Patience is really important – wealth isn’t an instantaneous thing, it takes time. My greatest returns came after I read a book called “The Coffeehouse Investor” by Bill Schultheis. Thanks for stopping by.

  • Great posting. I am always in favor of investment strategies that mitigate risk, and this looks like a steady and rational approach to me. I am glad it has worked out so well for you!

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